Brazil Raises Rate to 9% as Real Undercuts Inflation Fight

Brazil’s central bank raised the key rate by half a percentage point for a third straight meeting, as a plunge in the currency undermines efforts to slow inflation in the world’s second-largest emerging market.

The bank’s board, led by President Alexandre Tombini, today unanimously voted to raise the benchmark Selic rate to 9 percent from 8.5 percent, as forecast by 50 of 52 economists surveyed by Bloomberg. One economist expected a 75 basis-point increase, while one forecast a 25 basis-point boost.

“The committee considers that this decision will contribute to put inflation on a decline and assure that this trend will persist next year,” policy makers said, according to their statement posted on the central bank’s website. The statement was virtually identical to their July 10 communique.

Brazil’s central bank has stepped up efforts to prevent a declining real from undercutting the largest rate increase among the world’s major central banks by pushing inflation above its target range. While last week’s announcement of a $60 billion intervention plan has helped to buoy the currency, policy makers have maintained the pace of rate increases to fight pass-through to consumer prices, according to JPMorgan economist Fabio Akira.

“Inflation pressures remain strong,” Akira, the most accurate Brazil economic forecaster according to data compiled by Bloomberg, said by phone from Sao Paulo before today’s decision. “The weaker exchange rate is putting upwards pressure on prices.”

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, fell 12 basis points, or 0.12 percentage point, to 10.18 percent. The real strengthened 1.1 percent to 2.3452 per dollar.

‘No Room’

Brazil’s central bank on Aug. 22 said it will auction $1 billion of dollar loans on Fridays and offer $500 million of foreign-exchange swaps, Monday through Thursday, through at least Dec. 31. The real has fallen 10 percent in the last three months, the worst performance among 16 major currencies tracked by Bloomberg, as investors exit emerging markets in anticipation of a U.S. Federal Reserve decision to curtail monetary stimulus.

Consumer prices measured by the IPCA index rose 0.03 percent in July from the month prior, as lower food and transportation costs offset higher housing and education expenses, according to the national statistics agency.

While annual inflation slowed to 6.27 percent from 6.70 percent in June, the pace of price increases is still high enough to hinder growth, according to Carlos Kawall, the chief economist at Banco J. Safra SA. Brazil targets annual inflation at 4.5 percent, plus or minus two percentage points.

Quicker Inflation

Monthly price increases are expected to accelerate from July, central bank Economic Policy Director Carlos Hamilton said Aug. 12. Brazil’s monetary policy seeks to provide confidence in the control of inflation, which is being fanned by an expansionary fiscal policy and weaker real, he added.

“The inflation outlook is the main driver behind the continued rate increases,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said by phone from Sao Paulo before today’s meeting. “There is no room to absorb new price shocks.”

Banco Central do Brasil has raised borrowing costs by 175 basis points since April, more than any other central bank tracked by Bloomberg.

Consumer confidence has fallen in nine of the last 11 months, according to a survey from the Fundacao Getulio Vargas. Industrial confidence, as measured by the national industry confederation known as CNI, in July fell to its lowest level in four years before rebounding in August.

Slower Growth

Economists following Brazil’s economy have cut their 2013 and 2014 growth forecasts by more than one percentage point since January, according to a central bank survey published Aug. 26.

Finance Minister Guido Mantega has also rolled back 2013 economic growth estimates to about 2.5 percent from a forecast of 3 percent to 4 percent expansion earlier this year.

The shares of Brazilian telecommunications company Oi SA tumbled 8.9 percent Aug. 14 after the company reported an unexpected second-quarter loss. Oi increased provisions for bad debt by 97 percent from a year earlier, which Chief Executive Officer Zeinal Bava blamed on the “current economic environment.”

‘Bank Focus’

“Inflation reduced consumer’s purchasing power and confidence,” Kawall said by phone from Sao Paulo before today’s decision. “The central bank has to give a sign that the tightening cycle will continue.”

Brazil’s monetary policy seeks to mitigate inflation risk, Tombini said in a statement on Aug. 19. Inflation is under control and officials will work to avoid currency pass-through to consumer prices, Mantega said a week later.

The 175 basis-point increase in Brazil’s benchmark rate in 2013 -- initiated at Banco Central do Brasil’s April meeting -- ranks as the largest among 49 central banks tracked by Bloomberg worldwide.

Policy makers have reaffirmed their intention to extend rate increases, as inflation remains above target, said Banco Mizuho do Brasil’s Rostagno.

“The central bank used to have a double mandate: inflation and economic growth,” Rostagno said. “Now, we are seeing the central bank focus more exclusively on inflation control.”

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